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EX-23 - OHIO LEGACY CORPv216615_ex23.htm
EX-21 - OHIO LEGACY CORPv216615_ex21.htm
EX-32.1 - OHIO LEGACY CORPv216615_ex32-1.htm
EX-31.1 - OHIO LEGACY CORPv216615_ex31-1.htm
EX-31.2 - OHIO LEGACY CORPv216615_ex31-2.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the fiscal year ended December 31, 2010

 
OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the transition period from __________ to __________

Commission File Number: 000-31673

OHIO LEGACY CORP
(Exact name of registrant as specified in its charter)

Ohio
 
34-1903890
(State or other jurisdiction of incorporation or organization)
 
(I.R.S Employer Identification No.)
     
600 South Main Street,
North Canton, Ohio
 
 
44720
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code:  (330) 499-1900

Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
Common stock, without par value
 
The NASDAQ Stock Market LLC
   
(The NASDAQ Capital Market)
 
Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities act.  Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
 
 
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer o
   
Non-accelerated filer o
Smaller reporting company x
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o No x

As of June 30, 2010, the aggregate market value of the registrant’s common stock held by non-affiliates was $9,474,910, based on the closing sale price as reported on the NASDAQ Stock Market.
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 
Class
Outstanding as of March 29, 2011
   
Common stock, without par value
19,714,564
 
DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for the Annual Meeting of Shareholders to be held on May 17, 2011 are incorporated by reference into Part III of this Annual Report on Form 10-K.

Index to Exhibits begins on page 69.
 
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TABLE OF CONTENTS

PART I
   
Page
       
Item 1
Business.
 
4
Item 1A
Risk Factors
 
18
Item 1B
Unresolved Staff Comments.
 
18
Item 2
Properties.
 
18
Item 3
Legal Proceedings.
 
19
Item 4
(Removed and Reserved)
 
19
       
PART II
     
       
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
19
Item 6
Selected Financial Data
 
20
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
 
20
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
20
Item 8
Financial Statements and Supplementary Data.
 
30
Item 9
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
 
64
Item 9A
Controls and Procedures.
 
64
Item 9B
Other Information.
 
65
       
PART III
     
       
Item 10
Directors, Executive Officers and Corporate Governance.
 
65
Item 11
Executive Compensation.
 
65
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
 
65
Item 13
Certain Relationships and Related Transactions, and Director Independence.
 
66
Item 14
Principal Accounting Fees and Services.
 
66
       
PART IV
     
       
Item 15
Exhibits, Financial Statement Schedules
 
66
       
SIGNATURES
   
67
       
INDEX TO EXHIBITS
 
69
 
 
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PART I

Item 1.  Business.

Background

Ohio Legacy Corp (“Ohio Legacy”) is a bank holding company incorporated in July 1999 under the laws of the State of Ohio.  Ohio Legacy has one wholly-owned subsidiary, Premier Bank & Trust, National Association (“Bank”) (formerly known as Ohio Legacy Bank, National Association).  On March 23, 2010, the Bank received approval from the Comptroller of the Currency of its application to commence fiduciary powers pursuant to 12 USC 92a.  Subsequently, the Bank opted to include “Trust” in its name and announced a name change to Premier Bank and Trust, N.A. effective April 2010. Unless otherwise noted, the “Company,” “us,” “we,” and “our” refer to Ohio Legacy, together with the Bank. The Bank opened for business on October 3, 2000.

Ohio Legacy’s principal executive offices are located at 600 South Main Street, North Canton, Ohio 44720, and its telephone office is (330) 499-1900.  Shares of Ohio Legacy’s common stock, each without par value, are listed on The NASDAQ Capital Market under the symbol “OLCB.”

Ohio Legacy maintains an Internet Web site at www.ohiolegacycorp.com (this uniform resource locator, or URL, is an inactive textual reference only and is not intended to incorporate Ohio Legacy’s Internet Web site into this Annual Report on Form 10-K (this “Form 10-K”)).  Ohio Legacy makes available free of charge on or through its Internet Web site Ohio Legacy’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as Ohio Legacy’s definitive proxy statements filed pursuant to Section 14 of the Exchange Act, as soon as reasonably practicable after Ohio Legacy electronically files such material with, or furnishes it to, the Securities and Exchange Commission (the “SEC”).

Recapitalization

On February 19, 2010, Ohio Legacy closed (i) the sale of 15 million shares of its common stock, pursuant to a Stock Purchase Agreement assigned by Excel Financial, LLC (“Excel Financial”) to Excel Bancorp, LLC (“Excel Bancorp”) at a price of $1.00 per share and (ii) the sale of 2.5 million shares of its common stock to other local investors at a price of $1.00 per share.  The aggregate proceeds from the sales were $17.5 million.  Through its purchase of 15 million shares of Ohio Legacy’s common stock, Excel Bancorp, which did not own any Ohio Legacy securities before the closing, acquired approximately 76% of Ohio Legacy’s total outstanding shares of common stock.  See Note 2 to the consolidated financial statements for additional information regarding these transactions.

Products and Services

The Company, through the Bank’s four branch offices and a trust office, provides retail and commercial banking services to its customers located primarily in Stark, Wayne and Belmont Counties in Ohio.  These products include the acceptance of deposits for demand, savings, and time accounts and the servicing of those accounts, cash management and electronic funds transfer services, safe deposit box facilities and courier services, online internet banking with bill pay service, commercial loans, real estate mortgage loans, installment and personal loans and night depository facilities to customers.  The Bank also began to offer trust, wealth management and investment brokerage services in April 2010.

Commercial and Construction Lending Products

Commercial loans are primarily variable rate and include operating lines of credit and term loans made to small businesses based primarily on their ability to repay the loan from cash flows.  These loans typically are secured by business assets such as equipment or inventory.  For entity borrowers, the Bank generally obtains a personal guarantee of the business owner. As compared to retail lending, which includes residential real estate, personal installment loans and automobile loans, commercial lending entails significant additional risks.  These loans typically involve larger loan balances and are generally dependent on the businesses’ cash flows and may be subject to adverse conditions in the general economy or in a specific industry.  Management reviews the borrower’s cash flows when deciding whether or not to grant the credit.  Management also evaluates if estimated future cash flows will be adequate to service principal and interest of the new obligation in addition to existing obligations.  Additionally, the company’s historical performance, business principles and industry are reviewed prior to the extension of credit.  Commercial loans comprised 14.5% of the Bank’s loan portfolio at December 31, 2010.
 
 
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Commercial real estate loans are secured primarily by borrower-occupied business real estate or multifamily residential real estate, such as apartment buildings, and are dependent on the ability of the related business to generate adequate cash flow to service the debt.  These loans primarily carry variable interest rates.  Commercial real estate loans generally are originated with a loan-to-value ratio of 80% or less.  Management performs much the same analysis when deciding whether to grant a commercial real estate loan as it performs when deciding whether to grant a commercial loan.  Commercial real estate and multifamily real estate loans comprised 47.7% of the Bank’s loan portfolio at December 31, 2010.

Construction loans are secured by residential and business real estate.  Construction loans generally involve greater underwriter and default risks than do loans on existing real estate due to the inherent uncertainties in construction costs and the difficulty in valuing property under construction.  The Bank’s construction lending program is established in a manner to minimize risk of this type of lending by not making a significant number of loans on speculative projects located outside its geographic marketplace.  While not required to do so contractually, the Bank may finance the permanent loan at the end of the construction phase.  Construction loans also are generally made in amounts of 80% or less of the value of collateral.  Construction loans comprised 2.1% of the Bank’s loan portfolio at December 31, 2010.

Certain risks are involved in granting loans that primarily relate to the borrower’s ability and willingness to repay the debt.  Before the Bank extends a new loan to a customer, these risks are assessed through a review of the borrower’s past and current credit history, the collateral being used to secure the transaction in case the customer does not repay the debt, cash flows of any related businesses, the availability of personal guarantees and other factors.  Once the decision has been made to extend credit, the Bank’s credit officers monitor these factors throughout the life of the loan.

Retail Lending Products

Residential real estate loans, primarily fixed rate, and home equity lines of credit, primarily variable rate, are secured by the borrower’s residence.  These loans are made based on the borrower’s ability to make repayment from employment and other income.  Using secondary market approval standards, management assesses the borrower’s ability to repay the debt through a review of credit history and ratings, verification of employment and other income, review of debt-to-income ratios and other measures of repayment ability.  The Bank generally makes these loans in amounts of 90% or less of the value of collateral.  An appraisal is obtained from a qualified real estate appraiser for substantially all loans secured by real estate.  Beginning in November 2006, the Bank began originating residential real estate loans and selling these loans to the secondary market.  It is the strategy of the Company going forward to continue to sell long term, fixed rate loans in accordance with secondary market guidelines.

Consumer installment loans to individuals include loans secured by automobiles and other consumer assets, including home equity loans on personal residences.  Consumer loans for the purchase of new automobiles generally do not exceed 85% of the purchase price of the car. Loans for used cars generally do not exceed the average wholesale or trade-in value of the car as stipulated in a recent auto industry used car price guide.  Overdraft protection loans are unsecured personal lines of credit to individuals of demonstrated good credit character with reasonably assured sources of income and satisfactory credit histories.  Consumer loans generally involve more risk than residential mortgage loans because of the type and nature of collateral and, in certain types of consumer loans, the absence of collateral.  Since these loans generally are repaid from ordinary income of an individual or family unit, repayment may be adversely affected by job loss, divorce, ill health or a general decline in economic conditions.  The Bank assesses the borrower’s ability to make repayment through a review of credit history, credit ratings, debt-to-income ratios and other measures.

At December 31, 2010, residential real estate loans comprised 29.1% and consumer and home equity loans comprised 6.7% of the Bank’s total loans.
 
 
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Deposit Products

The Bank offers a broad range of deposit products, such as personal and business checking, savings and money market accounts, certificates of deposit, internet banking, cash management and direct-deposit services.  Deposit accounts are tailored to each market area at rates competitive with those offered in Wayne and Stark Counties in Ohio and consistent with the Bank’s asset-liability management goals.  All deposit accounts are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to the maximum amount permitted by law.  The Bank solicits deposit accounts from individuals, businesses, associations, financial institutions and government entities.  The Bank is not significantly affected by seasonal activity or large deposits of any individual depositor.

Employees

At December 31, 2010, the Bank had 70 employees, including 50 full-time employees.  The Bank provides a number of benefits to its employees, such as health, disability and life insurance for all qualified employees.  No employee is represented by a union or collective bargaining group. Management considers its employee relations to be good.  Ohio Legacy has no employees who are not also employed by the Bank.

Competition

The Bank operates in a highly competitive industry.  In its primary market areas of Stark, Wayne, and Belmont Counties in Ohio, the Bank competes for new deposit accounts and loans with numerous other commercial banks, both large regional banks and smaller community banks, as well as savings and loan associations, credit unions, finance companies, insurance companies, brokerage firms and investment companies.  Many of our competitors enjoy the benefits of greater financial resources, advanced technology, fewer regulatory constraints and lower cost structures.  The Bank’s ability to generate earnings is impacted in part by interest rates offered on loans and deposits, and by changes in the rates on loans and various other securities which comprise the Bank’s investment portfolio.  The Bank is competitive with respect to the interest rates and loan fees it charges, as well as in the variety of accounts and interest rates it offers to customers.  The dominant pricing mechanisms on loans are the Prime interest rate as published in the Wall Street Journal, U.S. Treasury Note rates with three-year or five-year maturities, and the London Interbank Offered Rate (“LIBOR”).  The interest margin in excess of the applicable base rate depends on the overall account relationship and the creditworthiness of the borrower.  Deposit rates are regularly reviewed and established by management.  The Bank’s primary objective in setting deposit rates is to remain competitive in the market area while maintaining an adequate interest rate spread (the difference between the yield earned on interest-earning assets and the rates paid on deposits and borrowed funds) to meet overhead costs and provide a profitable return.

Supervision and Regulation

The Bank is subject to supervision, regulation and periodic examination by the Office of the Comptroller of the Currency (the “OCC”) and Ohio Legacy is supervised by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).  Earnings of the Company are affected by state and federal laws and regulations and by policies of various regulatory authorities.  These policies include, for example, statutory maximum lending rates, loan loss reserves, requirements on maintenance of reserves against deposits, domestic monetary policies of the Federal Reserve Board, United States federal government fiscal policy, international currency regulations and monetary policies, certain restrictions on banks’ relationships with the securities business, capital adequacy requirements and liquidity restraints.

Regulation of Ohio Legacy

Bank Holding Company Act.  As a bank holding company, Ohio Legacy is subject to regulation under the Bank Holding Company Act of 1956, as amended (the “BHCA”).  Under the BHCA, Ohio Legacy is subject to periodic examination by the Federal Reserve Board and is required to file periodic reports regarding its operations and any additional information that the Federal Reserve Board may require.
 
 
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The BHCA generally limits the activities of a bank holding company to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries and engaging in any other activities that the Federal Reserve Board has determined to be so closely related to banking or to managing or controlling banks as to be incidental to those activities.  In addition, the BHCA requires bank holding companies to obtain the approval of the Federal Reserve Board prior to acquiring substantially all the assets of another bank or bank holding company, acquiring direct or indirect ownership or control of more than 5% of the voting shares of a bank or merging or consolidating with another bank holding company.

The Federal Reserve Board has extensive enforcement authority over bank holding companies, including, among other things, the ability to:  (i) assess civil money penalties; (ii) issue cease and desist or removal orders; and (iii) require that a bank holding company divest subsidiaries (including its subsidiary banks).  In general, the Federal Reserve Board may initiate enforcement actions for violations of laws and regulations and unsafe or unsound practices.

Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support those subsidiary banks. Under this policy, the Federal Reserve Board may require a bank holding company to contribute additional capital to an undercapitalized subsidiary bank and may disapprove of the payment of dividends to shareholders if the Federal Reserve Board believes the payment of such dividends would be an unsafe or unsound practice.  These provisions could have the effect of limiting Ohio Legacy’s ability to pay dividends on its common stock.

Capital Guidelines.  The OCC and the Federal Reserve Board each have adopted risk-based and leverage capital guidelines to evaluate the adequacy of capital of national banks and bank holding companies.  The guidelines involve a process of assigning various risk weights to different classes of assets, then evaluating the sum of the risk-weighted balance sheet structure against the capital base. Actual and required capital amounts are disclosed in Note 14 of the consolidated financial statements.  Failure to meet capital guidelines could subject a banking institution to various penalties, including termination of FDIC deposit insurance.  In addition, the OCC and the FDIC may take various corrective actions against any undercapitalized bank and any bank that fails to submit an acceptable capital restoration plan or fails to implement a plan accepted by the OCC or the FDIC.  These powers include, but are not limited to, requiring the institution to be recapitalized, prohibiting asset growth, restricting interest rates paid, requiring prior approval of capital distributions by any bank holding company that controls the institution, requiring divestiture by the institution of its subsidiaries or by the holding company of the institution itself, requiring new election of directors, and requiring the dismissal of directors and officers.

The Bank, through its Board of Directors, agreed to a Consent Order (the “Consent Order”) with the OCC dated February 17, 2009, that called for the Bank to reach and maintain tier 1 capital of at least 8.75% of adjusted total assets and total risk-based capital of at least 13.25% of risk-weighted assets by August 31, 2009.  Although the Bank did not achieve compliance with the capital requirements of the Consent Order by this date, on February 19, 2010, pursuant to a Stock Purchase Agreement entered into on November 15, 2009 with Excel Financial LLC that was subsequently assigned to Excel Bancorp, the Company received $15.0 million from Excel Bancorp in connection with Excel Bancorp’s purchase of 15 million shares of common stock, and raised an additional $2.5 million in connection with a private placement of 2.5 million shares of common stock.  After the closing of these transactions, Ohio Legacy contributed approximately $16.2 million to the capital of the Bank.  With the additional capital invested in the Bank, the Company exceeded the minimum capital ratios required under the Consent Order.  See Notes 2 and 18 to the consolidated financial statements for additional information regarding the Consent Order and Ohio Legacy’s sale of its common stock.

Regulation of the Bank

The Bank is also subject to federal regulation regarding such matters as reserves, limitations on the nature and amount of loans and investments, issuance or retirement of its securities, limitations on the payment of dividends and other aspects of banking operations.

The Bank is a member of the Federal Reserve System and, because it is a national bank, is regulated by the OCC. Accordingly, the Bank is subject to periodic examinations by the OCC.  These examinations are designed primarily for the protection of the depositors of the Bank and not for its shareholder, Ohio Legacy, or for the shareholders of Ohio Legacy.  The OCC has broad enforcement powers over national banks, including the power to impose fines and other civil and criminal penalties and to appoint a conservator or receiver if any of a number of conditions are met.
 
 
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Dividend Restrictions. The Bank is a legal entity separate and distinct from Ohio Legacy, although Ohio Legacy owns 100% of the outstanding stock of the Bank.  Virtually all of Ohio Legacy’s revenues result from dividends paid by the Bank.  The Bank is subject to laws and regulations that limit the amount of dividends it can pay to Ohio Legacy.  Under OCC regulations, a national bank, such as the  Bank, may not declare a dividend in excess of its undivided profits.  Additionally, the Bank may not declare a dividend if the total amount of all dividends declared by the Bank in any calendar year, including the proposed dividend, exceeds the total of the Bank’s retained net income of that year to date, combined with its retained net income of the preceding two years.  However, a dividend that does not meet this measurement may be approved by the OCC in certain circumstances.  In addition, the Bank may not declare or pay any dividend if, after making the dividend, the Bank would be undercapitalized under applicable federal regulations.  Furthermore, the Consent Order requires that the Board of Directors provide a written request to the OCC for review and determination of no supervisory objection prior to paying any dividends.

FDIC.  The FDIC is an independent federal agency that insures the deposits of federally-insured banks and savings associations up to prescribed limits.  On July 21, 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law, which, in part, permanently raises the current standard maximum deposit insurance amount to $250,000.  The FDIC insurance coverage limit applies per depositor, per insured depository institution for each account ownership category.

On November 9, 2010, the FDIC issued a Final Rule implementing section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act that provides for unlimited insurance coverage of noninterest-bearing transaction accounts.  Beginning December 31, 2010, through December 31, 2012, all noninterest-bearing transaction accounts are fully insured, regardless of the balance of the account, at all FDIC-insured institutions.  The unlimited insurance coverage is available to all depositors, including consumers, businesses, and government entities.  This unlimited insurance coverage is separate from, and in addition to, the insurance coverage provided to a depositor’s other deposit accounts held at an FDIC-insured institution.  The term “noninterest-bearing transaction account” includes a traditional checking account or demand deposit account on which the insured depository institution pays no interest.  It also includes Interest on Lawyers Trust Accounts (“IOLTAs”).  It does not include other accounts, such as traditional checking or demand deposit accounts that may earn interest, NOW accounts and money-market deposit accounts.

The FDIC is required to maintain designated levels of reserves.  The FDIC may increase assessment rates if necessary to restore the ratio of reserves to insured deposits to its target level within a reasonable time and may decrease rates if the target level has been met.  Assessments vary based on the risk the institution poses to the deposit insurance fund and the FDIC may alter its method of determining risk at any time.  The risk level is determined based on the institution's capital level and the FDIC's level of supervisory concern about the institution.  The FDIC may, in its discretion, impose special assessments on insured institutions at any time.  In May 2009, the FDIC imposed a special assessment on all insured depository institutions of five basis points on the amount of the institution’s assets.  In November 2009, the FDIC approved a final rule requiring banks to prepay their estimated quarterly assessments for the fourth quarter of 2009, as well as all of 2010, 2011, and 2012 on December 30, 2009.  The Bank was exempted by the FDIC from prepaying its estimated assessments for 2010 through 2012 under a provision of the final rule permitting the FDIC, after consultation with the Bank’s primary federal regulator, to waive the prepayment requirement if prepayment poses a safety and soundness risk for the institution.  The FDIC may impose additional special assessments or increase premiums in the future.

The FDIC safeguards the safety and soundness of financial institutions through examinations of insured institutions. The Bank is subject to examination by the FDIC, and the Bank’s deposits are assessed deposit insurance premiums by the Bank Insurance Fund of the FDIC.  Under the FDIC’s deposit insurance assessment system, the assessment rate for any insured institution may vary according to regulatory capital levels of the institution and other factors such as supervisory evaluations.
 
 
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The FDIC is authorized to prohibit any insured institution from engaging in any activity that poses a serious threat to the insurance fund and may initiate enforcement actions against banks. The FDIC may also terminate the deposit insurance of any institution that has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, order or condition imposed by the FDIC.  If deposit insurance is terminated, the deposits at the institution at the time of termination, less subsequent withdrawals, will continue to be insured for a period from six months to two years, as determined by the FDIC.  The Company is not aware of any existing circumstances that could result in termination of the Bank’s deposit insurance.

Dodd-Frank Wall Street Reform and Consumer Protection Act.  The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) marks the greatest legislative change to financial supervision since the 1930s.  It affects the regulatory environment in the areas of securities, derivatives, executive compensation, consumer protection and corporate governance that will grow out of the general framework established by the Act.  The Act was designed to become effective in stages following the regulatory implementation phase during which an intense period of rulemaking will occur.  Agency rulemaking will largely establish the parameters of the new regulatory framework and is expected to occur for an extended period.  While much of the Act will directly affect large, complex financial institutions, smaller community banks will also face a more complicated and expensive regulatory framework.

The following changes that will be implemented pursuant to the Dodd-Frank Act may have an effect on the Company’s business:
 
 
·
the Dodd-Frank Act creates a Consumer Financial Protection Bureau with broad powers to adopt and enforce consumer protection regulations;
 
 
·
new capital regulations for bank holding companies will be adopted, which may impose stricter requirements, and any new trust preferred securities will no longer constitute Tier I capital;
 
 
·
the federal law prohibiting the payment of interest on commercial demand deposit accounts will be eliminated effective in July 2011;
 
 
·
the standard maximum amount of deposit insurance per customer is permanently increased to $250,000, and non-interest bearing transaction accounts will have unlimited insurance through December 31, 2012;
 
 
·
the assessment base for determining deposit insurance premiums will be expanded and change the assessment base from deposits to average assets minus average tangible equity; and
 
 
·
new corporate governance requirements applicable generally to all public companies in all industries will require new compensation practices and disclosure requirements, including requiring companies to “claw back” incentive compensation under certain circumstances, to provide shareholders the opportunity to cast a non-binding vote on executive compensation and to consider the independence of compensation advisers.
 
While the ultimate effect of the Dodd-Frank Act on the Company cannot yet be determined, the law is likely to increase compliance costs and fees paid to regulators, along with possible restrictions on the operations of the Company and its subsidiaries.

Community Reinvestment Act.  The Community Reinvestment Act (the “CRA”) requires depository institutions to assist in meeting the credit needs of their market areas, including low and moderate-income areas, consistent with safe and sound banking practice.  Under the CRA, each institution is required to adopt a statement for each of its marketing areas describing the depository institution’s efforts to assist in its communities’ credit needs. Depository institutions are examined periodically for compliance and are assigned ratings.  Banking regulators consider these ratings when considering approval of a proposed transaction by an institution.

 
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Privacy Provisions of Gramm-Leach-Bliley Act
 
Under the Gramm-Leach-Bliley Act, federal banking regulators were required to adopt rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party.

Patriot Act
 
In response to the terrorist events of September 11, 2001, the Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”) was signed into law in October 2001. The Patriot Act gives the United States Government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. Title III of the Patriot Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions. Among other requirements, Title III and related regulations require regulated financial institutions to establish a program specifying procedures for obtaining identifying information from customers seeking to open new accounts and establish enhanced due diligence policies, procedures and controls designed to detect and report suspicious activity. The Company has established policies and procedures that are believed to be compliant with the requirements of the Patriot Act.

Transactions with Affiliates, Directors, Executive Officers and Shareholders

Section 23A and 23B of the Federal Reserve Act and Regulation W restrict transactions by banks and their subsidiaries with their affiliates.  An affiliate of a bank is any company or entity which controls, is controlled by or is under common control with the bank.  Ohio Legacy, Excel Bancorp and the Bank are affiliates.  Generally, Sections 23A and 23B and Regulation W:  (i) limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of that bank’s capital stock and surplus (i.e., tangible capital); (ii) limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with all affiliates to 20% of that bank’s capital stock and surplus; and (iii) require that all such transactions are on terms substantially the same, or at least as favorable to the bank subsidiary, as those provided to a non-affiliate.

The term “covered transaction” includes the making of loans to the affiliate, the purchase of assets from the affiliate, issuance of a guarantee on behalf of the affiliate, the purchase of securities issued by the affiliate, and other similar types of transactions.

A bank’s authority to extend credit to executive officers, directors and greater than 10% shareholders, as well as entities such persons control, is subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder by the Federal Reserve Board.  Among other things, these loans must be made on terms substantially the same as those offered to unaffiliated individuals or be made as part of a benefit or compensation program and on terms widely available to employees, and must not involve a greater than normal risk of repayment.  In addition, the amount of loans a bank may make to these persons is based, in part, on the bank’s capital position, and specified approval procedures must be followed in making loans which exceed specified amounts.

Effects of Government Monetary Policy

The earnings of the Company are affected by general and local economic conditions and by the policies of various governmental regulatory authorities. In particular, the Federal Reserve Board regulates monetary policy, credit conditions and interest rates that may influence general economic conditions primarily through open market acquisitions or dispositions of United States government securities, varying the discount rate on member bank borrowings and setting reserve requirements against member and nonmember bank deposits. The Federal Reserve Board’s monetary policies have historically had a significant effect on the interest income and interest expense of commercial banks, including the Bank, and are expected to continue to do so in the future.

 
10

 
 
Future Regulatory Uncertainty

Federal regulation of bank holding companies and financial institutions changes regularly and is the subject of constant legislative debate. Future legislation and policies may have a significant influence on overall growth and distribution of loans, investments and deposits and may affect interest rates charged on loans or paid on time and savings deposits.  Such legislation and policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.  As a result of the continuous changes in legislation related to the financial services industry, the Company cannot forecast how federal regulation of financial institutions may change in the future or its impact on the Company’s operations and profitability.

 
11

 
 
Statistical Disclosures

The following schedules present, for the periods indicated, certain financial and statistical information of the Company as required under the SEC’s Industry Guide 3, “Statistical Disclosure by Bank Holding Companies.”

Industry Guide 3 - Item I. Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential

A. & B.  Average Balance Sheets and Related Analysis of Net Interest Earnings

The following table sets forth information relating to the Company’s average balance sheet and reflects the average yield on interest-earning assets and the average cost of interest-bearing liabilities for the periods indicated. These yields and costs are derived by dividing income or expense by the average balances of interest-earning assets or interest-bearing liabilities for the periods presented.
 
 
12

 
 
    
Year Ended December 31,
 
   
2010
   
2009
 
   
Average
   
Interest
               
Interest
       
   
Outstanding
   
Earned/
   
Yield/
   
Average
   
Earned/
   
Yield/
 
(Dollars in Thousands)
 
Balance
   
Paid
   
Rate
   
Balance
   
Paid
   
Rate
 
Assets
                                   
Interest-earning assets:
                                   
Interest-bearing deposits in
                                   
other financial institutions and federal funds sold
  $ 33,395     $ 76       0.23 %   $ 18,368     $ 37       0.20 %
Securities available for sale
    27,214       898       3.30 %     34,041       1,505       4.42 %
Securities held to maturity
    2,982       114       3.82 %     2,999       114       3.81 %
Federal agency stock
    1,465       71       4.87 %     1,309       64       4.92 %
Loans (1)
    95,175       5,746       6.04 %     111,275       6,985       6.28 %
                                                 
Total interest-earning assets
    160,231       6,905       4.31 %     167,992       8,705       5.18 %
                                                 
Noninterest-earning assets
    9,711                       15,657                  
Total assets
  $ 169,942                     $ 183,649                  
                                                 
Liabilities and Shareholders' Equity
                                               
Interest-bearing liabilities:
                                               
Interest-bearing demand deposits
  $ 9,253     $ 52       0.55 %   $ 8,716     $ 65       0.75 %
Savings accounts
    16,163       126       0.78 %     16,505       244       1.48 %
Money market accounts
    43,094       365       0.85 %     41,134       582       1.42 %
Certificates of deposit
    55,280       1,304       2.36 %     71,340       2,430       3.41 %
Total interest-bearing deposits
    123,790       1,847       1.49 %     137,695       3,321       2.41 %
                                                 
Other Borrowings
    12,940       367       2.84 %     20,793       729       3.50 %
      Total Interest-bearing liabilities
    136,730       2,214       1.62 %     158,488       4,050       2.56 %
                                                 
Noninterest-bearing demand deposits
    16,855                       15,855                  
Noninterest-bearing liabilities
    867                       625                  
                                                 
Total liabilities
    154,452                       174,968                  
Shareholders' equity
    15,490                       8,681                  
    Total liabilities and
                                               
shareholders' equity
  $ 169,942                     $ 183,649                  
                                                 
Net interest income; interest rate spread (2)
          $ 4,691       2.69 %           $ 4,655       2.62 %
Net earning assets
  $ 23,501                     $ 9,504                  
Net interest margin (3)
                    2.93 %                     2.77 %
                                                 
Average interest-earning assets to interest-bearing liabilities
    1.17   X                   1.06   X              
 
(1)
Average loans are net of net deferred loan fees and costs and loans in process. Nonaccrual loans are included in noninterest-earning assets. Fee income is included in interest earned.
 
(2)
Interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
 
(3)
Net interest margin represents net interest income divided by average interest-earning assets.
 
C.  Interest Differential

The table below describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume (change in balances multiplied by prior year rate), (2) changes in rate (change in rates multiplied by prior year balance) and (3) total changes in rate and volume. The combined effects of changes in both volume and rate, which are not separately identified, have been allocated proportionately to the change due to volume and the change due to rate.
 
 
13

 
 
   
For the Year Ended December 31,
 
   
2010 vs. 2009
   
2009 vs. 2008
 
   
Increase (Decrease) due to
   
Increase (Decrease) due to
 
(Dollars in thousands)
 
Volume
   
Rate
   
Total
   
Volume
   
Rate
   
Total
 
Change in interest income attributable to:
                                   
Interest-bearing deposits and federal funds sold
  $ 34     $ 5     $ 39     $ 83     $ (115 )   $ (32 )
Securities available for sale
    (268 )     (339 )     (607 )     62       (288 )     (226 )
Securities held to maturity
    (1 )     -       (1 )     (1 )     -       (1 )
Federal bank stock
    8       (1 )     7       (10 )     (8 )     (18 )
Loans
    (980 )     (259 )     (1,239 )     (1,070 )     (626 )     (1,696 )
Total assets
  $ (1,207 )   $ (594 )   $ (1,801 )   $ (936 )   $ (1,037 )   $ (1,973 )
                                                 
Change in interest expense attributable to:
                                               
Interest-bearing demand deposits
  $ 4     $ (17 )   $ (13 )   $ (6 )   $ (28 )   $ (34 )
Savings accounts
    (5 )     (115 )     (120 )     144       9       153  
Money market accounts
    27       (244 )     (217 )     (99 )     (478 )     (577 )
Certificates of deposit
    (476 )     (649 )     (1,125 )     79       (390 )     (311 )
Other borrowings
    (240 )     (122 )     (362 )     (75 )     (104 )     (179 )
Total interest-bearing liabilities
  $ (690 )   $ (1,147 )   $ (1,837 )   $ 43     $ (991 )   $ (948 )
                                                 
Change in net interest income
                  $ 36                     $ (1,025 )
 
 
Industry Guide 3 - Item II. Investment Portfolio

A.     This information is contained in Note 3 to the consolidated financial statements, which is incorporated herein by reference.

B.     Other securities consist of preferred stock issued by the Federal National Mortgage Association (“FNMA”) and the Federal Home Loan Mortgage Corporation (“FHLMC”) that has a stated rate and an initial call date of five years from the date of issuance. Based on actions taken by the Treasury Department on September 7, 2008, the dividend on the preferred stock has been suspended indefinitely.

Maturities of Investment Securities at Fair Value (Dollars in thousands)
 
                                     
               
Due in one
   
Due after one
 
   
No Stated Maturity
   
year or less
   
through five years
 
         
Weighted
         
Weighted
         
Weighted
 
         
Average
         
Average
         
Average
 
   
Amount
   
Yields
   
Amount
   
Yields
   
Amount
   
Yields
 
U.S. Government sponsored agencies
    -       -       -       -       4,929       0.81 %
Agency pass- through MBS
    -       -       -       -       -       -  
Other MBS
    -       -       -       -       -       -  
State and political
    -       -       -       -       921       5.54 %
Other securities
  $ 71       -       -       -       -       -  
     Total securities
  $ 71       -       -       -     $ 5,850       1.55 %

 
14

 
 
   
Due after five
                         
   
through ten years
   
Due after ten years
   
Total
 
         
Weighted
         
Weighted
         
Weighted
 
         
Average
         
Average
         
Average
 
   
Amount
   
Yields
   
Amount
   
Yields
   
Amount
   
Yields
 
U.S. Government sponsored agencies
    3,334       0.45 %     -       -     $ 8,263       0.67 %
Agency pass- through MBS
    1,061       2.86 %     15,564       4.05 %     16,625       3.97 %
Other MBS
    -       -       248       4.99 %     248       4.99 %
State and political
    936       5.69 %     959       5.82 %     2,816       5.69 %
Other securities
    -       -       -       -       71       0.00 %
     Total securities
  $ 5,331       1.85 %   $ 16,771       4.17 %   $ 28,023       3.17 %

Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.

C.       At December 31, 2010, there were no holdings of securities, other than mortgage-backed securities issued by U.S. Government sponsored enterprises, in amounts greater than 10% of shareholders’ equity.

Industry Guide 3 - Item III. Loan Portfolio

A.       Types of Loans

This information is contained in Note 4 to the consolidated financial statements, which is incorporated herein by reference.

B.       Maturities and Sensitivities of Loans to Changes in Interest Rates

The following is a schedule of maturities of loans based on contractual terms and assuming no amortization or prepayments, excluding residential real estate and consumer loans, as of December 31, 2010:

   
Maturing
       
         
After one
             
(Dollars in thousands)
 
One year
   
through
   
After five
       
   
or less
   
five years
   
years
   
Total
 
Commercial
  $ 7,702     $ 6,906     $ 506     $ 15,114  
Commercial Real Estate
    992       7,484       33,747       42,223  
Real Estate Construction
    1,198       797       143       2,138  
Total
  $ 9,892     $ 15,187     $ 34,396     $ 59,475  

Amount of loans reported above due after one year which have adjustable interest rates (dollars in thousands):

Fixed Rate
  $ 9,298  
Adjustable Rate
    40,285  
Total
  $ 49,583  

C.       Risk Elements

1.     Nonaccrual, Past Due and Restructured Loans - This information is contained in Note 4 to the consolidated financial statements, which is incorporated herein by reference.

The Bank’s policy for placing loans on nonaccrual status is to cease accruing interest on loans when management believes that collection of interest is doubtful or when loans are past due as to principal and interest for 90 days or more, except that, in certain circumstances, interest accruals are continued on loans deemed by management to be fully collectible. In such cases, loans are evaluated individually in order to determine whether to continue income recognition after 90 days beyond the due dates. When loans are placed on nonaccrual status, any accrued interest is charged against interest income.

When an analysis of a borrower's operating results and financial condition indicates the borrower’s underlying cash flows are not adequate to meet debt service requirements and the collateral securing the loan may become the principal source of repayment, the loan is evaluated for impairment. Smaller-balance homogeneous loans are evaluated for impairment in total, however these loans are evaluated for impairment individually if placed on nonaccrual status. Homogeneous loans include residential first mortgage and construction loans secured by one- to four-family residences, consumer loans, credit card loans and home equity loans. Commercial, agricultural and commercial real estate loans are evaluated individually for impairment. In addition, loans held for sale and leases are excluded from consideration of impairment.
 
 
15

 
 
Loans individually considered impaired are carried at (a) the present value of expected cash flows, discounted at the loan’s effective interest rate, or (b) the fair value of collateral, if the loan is collateral dependent.  A portion of the allowance for loan losses may be allocated to impaired loans. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

2.     Potential Problem Loans - At December 31, 2010, management did not identify any loans as to which it had serious doubts about the borrowers’ ability to comply with present loan repayment terms other than those included above in Industry Guide 3 - Item III.C.1, except $5,116,081 of loans not included above but classified as substandard assets for regulatory purposes

3.     Foreign Loans Outstanding - There were no foreign loans outstanding during any period presented.

4.     Loan Concentrations – The table below depicts loans outstanding at December 31, 2010, by loan type:

   
Total Loans
   
% of total
 
1-4 Single family residential mortgage
  $ 23,880,698       22.90 %
1-4 family rental property
    6,439,968       6.18 %
Home equity
    6,277,141       6.02 %
Consumer
    736,553       0.71 %
Commercial
    9,066,623       8.69 %
Commercial secured by trust assets
    6,047,617       5.80 %
Commercial real estate:
               
Non-owner occupied
    18,286,832       17.54 %
Owner occupied
    23,935,883       22.95 %
Multi-unit
    7,465,237       7.16 %
Construction and development
    2,137,849       2.05 %
Total
  $ 104,274,401       100.00 %

D.     Other Interest-bearing Assets

At December 31, 2010, there were no other interest-bearing assets required to be disclosed under Industry Guide 3 - Items III.C.1. or 2 if such assets were loans.
 
Industry Guide 3 - Item IV.  Summary of Loan Loss Experience

A. Analysis of the Allowance for Loan Losses

Activity in the allowance for loan losses for the years ended December 31 2010 and 2009 was as follows:

   
2010
   
2009
 
             
Balance, January 1
  $ 3,945,670     $ 3,398,284  
Provision for loan losses
    (116,147 )     4,507,055  
Loans charged-off:
               
     Commercial
    (71,941 )     (1,463,167 )
     Commercial real estate
    (362,004 )     (1,219,370 )
Residential real estate
    (153,031 )     (221,830 )
Construction
    (347,093 )     (1,501,839 )
Consumer and home equity
    (19,057 )     (22,242 )
Total loans charged-off
    (953,126 )     (4,428,448 )
Recoveries:
               
     Commercial
    134,948       4,558  
     Commercial real estate
    15,235       55,279  
     Residential real estate
    9,490       9,868  
     Construction
    18,000       380,870  
     Consumer and home equity
    1,696       18,204  
          Total recoveries
    179,369       468,779  
                 
Balance, December 31
  $ 3,055,766     $ 3,945,670  
                 
                 
Balance as a percentage of total loans
    2.93 %     3.76 %
 
 
16

 
 
The allowance for loan losses balance and the provision for loan losses charged to operating expense are determined by management based on periodic reviews of the Bank’s loan portfolio, economic conditions and various other circumstances that are subject to change over time. In making this judgment, management reviews selected large loans as well as loans individually considered impaired, other delinquent, nonaccrual and problem loans and loans to industries experiencing economic difficulties. The collectability of these loans is evaluated after considering the current operating results and financial position of the borrower, estimated market value of collateral, guarantees and the Company’s collateral position versus other creditors. Judgments, which are necessarily subjective, as to the probability of losses and the amounts of such losses are formed on these loans, as well as other loans taken together.

B.  Allocation of the Allowance for Loan Losses

While management’s periodic analysis of the adequacy of the allowance for loan losses may allocate portions of the allowance to specific problem loan situations, the entire allowance is available for any loan charge-offs that occur. The following schedule is a breakdown of the allowance for loan losses allocated by type of loan and related ratios at December 31 2010 and 2009:

   
2010
   
2009
 
   
Allowance Amount
   
% of Loans in each Category to Total Loans
   
Allowance Amount
   
% of Loans in each Category to Total Loans
 
Commercial
  $ 287,569       14.5     $ 313,888       7.3  
Real estate:
                               
Commercial
    1,553,197       40.4       1,681,022       45.4  
Multifamily residential
    454,670       7.2       577,800       5.5  
Residential
    514,690       29.1       629,057       31.6  
Construction
    141,635       2.1       554,659       3.8  
Consumer and home equity
    104,005       6.7       189,244       6.4  
Total
  $ 3,055,766       100.0     $ 3,945,670       100.0  

Industry Guide 3 - Item V. Deposits

A.  Average Amount and Average Rate Paid On Deposits.

   
2010
   
2009
 
(Dollars in thousands)
 
Average Balances
   
Average Rate
   
Average Balances
   
Average Rate
 
Noninterest-bearing demand deposits
  $ 16,855       N/A     $ 15,855       N/A  
Interest-bearing demand deposits
    9,253       0.55 %     8,716       0.75 %
Savings accounts
    16,163       0.78 %     16,505       1.48 %
Money market accounts
    43,094       0.85 %     41,134       1.42 %
Certificates of deposit
    55,280       2.36 %     71,340       3.41 %
Total deposits
  $ 140,645             $ 153,550          
 
 
17

 
 
B.  Other categories – not applicable.

C.  Foreign deposits – not applicable.

D.  The following is a schedule of maturities of certificates of deposit in amounts of $100,000 or more as of December 31, 2010:

(Dollars in thousands)
     
Three months or less
  $ 7,778  
Over three through six months
    5,172  
Over six through twelve months
    4,377  
Over twelve months
    4,605  
Total
  $ 21,932  

E.  Time deposits greater than $100,000 issued by foreign offices – not applicable.

Industry Guide 3 - Item VI.  Return on Equity and Assets

   
2010
   
2009
 
Return on average assets
    -1.8 %     -3.6 %
Return on average equity
    -20.1 %     -76.7 %
Dividend payout ratio
    0       0  
Average shareholders’ equity to average assets
    9.1 %     4.7 %

Industry Guide 3 - Item VII. Short-Term Borrowings

During 2010, the Company entered into repurchase agreements as a funding source for its operations.  The Company also has available credit with the Federal Home Loan Bank (“FHLB”) and advances from that will mature within the next twelve months.   This information is contained in Notes 9 and 10 to the consolidated financial statements, which are incorporated herein by reference.

Item 1A.  Risk Factors

Not required.

Item 1B.  Unresolved Staff Comments.

None.

Item 2. Properties.

The Bank currently owns or leases and operates four banking offices, including its main office, and an operations center:

·   
North Canton Main Office, 600 South Main Street, North Canton, Ohio 44720 (own)
·   
Wooster Branch Office, 305 West Liberty Street, Wooster, Ohio, 44691 (capital lease)
·   
Belden Village Branch Office, 6141 Whipple Ave NW, North Canton, OH  44720 (operating lease)
·   
Wooster Milltown Branch Office, 3562 Commerce Parkway, Wooster, Ohio 44681 (own)
·   
Wooster Operations Center, 2375 Benden Drive, Suite C, Wooster, Ohio, 44691 (operating lease)
 
 
18

 
 
The Bank considers the physical properties it occupies to be suitable and adequate for the purposes for which they are being used.  See Note 6 to the consolidated financial statements for additional information regarding our properties.

Item 3. Legal Proceedings.

The Company is not a party to any material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Company.  No routine litigation in which the Company is involved is expected to have a material adverse impact on the financial position or results of operations of the Company.

See Note 18 to the consolidated financial statements for information regarding the Consent Order that the Bank agreed to with its primarily federal regulator, the OCC, on February 17, 2009.

Item 4.  (Removed and Reserved)

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market for the Company’s Common Stock

Ohio Legacy’s common stock is publicly traded on the NASDAQ Capital Market under the symbol “OLCB.” As of March 24, 2011, there were 19,714,564 shares of Ohio Legacy’s common stock issued and outstanding and there were approximately 260 holders of record. The following table summarizes the highest and lowest sales prices for Ohio Legacy’s common stock for each quarter during 2010 and 2009, as reported on the NASDAQ Stock Market:
 
   
2010
   
2009
 
   
HIGH
   
LOW
   
HIGH
   
LOW
 
First Quarter
  $ 5.00     $ 1.25     $ 2.75     $ 1.22  
Second Quarter
    2.97       2.18       3.50       1.25  
Third Quarter
    2.60       1.81       2.40       0.70  
Fourth Quarter
    2.39       1.80       2.07       0.55  
 
No cash dividends were declared or paid by Ohio Legacy during 2010 or 2009. The payment of dividends by the Bank to Ohio Legacy and by Ohio Legacy to its shareholders is subject to restrictions by regulatory agencies.  The Company is currently not able to declare or pay dividends without prior approval from its regulators.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources” and Note 14 to the consolidated financial statements for information regarding the restrictions on the Company’s ability to pay dividends.

Recent Sales of Unregistered Securities

As previously discussed under “Recapitalization,” Ohio Legacy and the Bank entered into a Stock Purchase Agreement with Excel Financial on November 15, 2009.  Under the terms of the Stock Purchase Agreement, Excel Financial agreed to purchase 15 million shares of Ohio Legacy’s common stock at a price of $1.00 per share.  As a condition to Excel Financial’s purchase of the shares, Ohio Legacy agreed to sell a minimum of 1.5 million shares of its common stock to investors other than Excel Financial in a private offering, and to use its best efforts to sell an additional one million shares of its common stock in the same private offering, all at a purchase price of $1.00 per share.

On February 19, 2010, Ohio Legacy closed (i) the sale of 15 million shares of its common stock, pursuant to the Stock Purchase Agreement, to Excel Bancorp, at a price of $1.00 per share and (ii) the sale of 2.5 million shares of its common stock to other local investors at a price of $1.00 per share.  The aggregate proceeds from the sales were $17.5 million.  Net proceeds from the sales were $16.8 million, after the Company’s payment of legal, investment banking, accounting and other issuance expenses of approximately $700,000.  Through its purchase of 15 million shares of Ohio Legacy’s common stock, Excel Bancorp, which did not own any Ohio Legacy securities before the closing, acquired approximately 76% of Ohio Legacy’s total outstanding shares of common stock.
 
 
19

 
 
The shares of Ohio Legacy common stock sold in these transactions were not registered under the Securities Act of 1933, as amended (the “Securities Act”), or the securities laws of any state, and were offered and sold in reliance on the exemption from registration afforded by Section 4(2) and Regulation D (Rule 506) under the Securities Act and corresponding provisions of state securities laws, which exempt transactions by an issuer not involving any public offering.  The offering was made solely to “accredited investors,” as that term is defined in Regulation D under the Securities Act.  The shares of common stock sold in the offering may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements.  Certificates representing these shares of Ohio Legacy common stock contain a legend stating the same.  See Note 2 to the consolidated financial statements for additional information regarding these transactions.

Issuer Purchases of Equity Securities

There were no purchases made by or on behalf of the Company or any affiliated purchaser of shares of Ohio Legacy’s common stock during the fourth quarter of 2010.

Item 6.  Selected Financial Data

Not required.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

Not required.

Item 7.  Management’s Discussion and Analysis.

In the following section, management presents an analysis of Ohio Legacy Corp's financial condition and results of operations as of and for the years ended December 31, 2010 and 2009. This discussion is provided to give shareholders a more comprehensive review of the issues facing management than could be obtained from an examination of the financial statements alone.  This analysis should be read in conjunction with the consolidated financial statements and the accompanying notes included in this Form 10-K.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-K, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act which can be identified by the use of forward-looking terminology, such as “may,” “might,” “could,” “would,” “believe,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “estimate,” “project “or “continue” or the negative version of such terms or comparable terminology.  All statements other than statements of historical fact included in this Form 10-K, including statements regarding our outlook, financial position, results of operation, liquidity, capital resources and interest rate sensitivity are forward-looking statements.

The Private Securities Litigation Reform Act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the forward-looking statements.  We desire to take advantage of the “safe harbor” provisions of that Act.

Forward-looking statements speak only as of the date on which they are made and, except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date on which the statement is made.
 
 
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Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results to be materially different from any future results expressed or implied by such forward-looking statements. Although we believe the assumptions, judgments and expectations reflected in such forward-looking statements are reasonable, we can give no assurance such assumptions, judgments and expectations will prove to have been correct. Important factors that could cause actual results to differ materially from those in the forward-looking statements included in this Form 10-K include, but are not limited to:
 
·   
competition in the industry and markets in which we operate;

·   
rapid changes in technology affecting the financial services industry;

·   
changes in government regulation;

·   
general economic and business conditions and real estate valuations in our primary market areas could adversely impact results of operations, financial condition and cash flows;

·   
changes in industry conditions created by state and federal legislation and regulations;

·   
changes in interest rates and the impact of future interest rate changes on our profitability, capital adequacy and the fair value of our financial assets and liabilities;

·   
our ability to retain existing customers and attract new customers;

·   
our development of new products and services and their success in the marketplace;

·   
the adequacy of our allowance for loan losses;

·   
deposit insurance premiums assessed on the Bank may increase and have a negative impact on earnings;

·   
our ability to seek additional capital in the future; and

·   
our anticipated loan and deposit account growth, expense levels, liquidity and capital resources and projections of earnings.

OVERVIEW OF STRATEGIC DEVELOPMENTS

In recent years, the Company was burdened by high levels of problem loans and a sizeable portfolio of other real estate owned (“OREO”).  In February 2009, the Company entered into a Consent Order with the OCC focusing on capital adequacy and credit quality.  Although capital preservation was a key priority for the Company during the 2009, the combination of credit-related charges, the expenses and resources required for the administration of problem assets, and impairment losses associated with FNMA and FHLMC securities resulted in charges to capital that left the Company critically undercapitalized by year-end 2009.

Throughout 2009, various strategies were explored to raise capital in an unfavorable capital market when many financial institutions were facing significant credit challenges.  In November 2009, the Company entered into a Stock Purchase Agreement with Excel Financial.  The Stock Purchase Agreement closed in February 2010 and resulted in combined gross proceeds to the Company from the issuance of 17.5 million shares of common stock to Excel Bancorp and other local investors totaling $17.5 million.  Subsequent to closing and in accordance with the terms of the Stock Purchase Agreement, the Company appointed a new executive management team, accepted the resignations of seven directors, and appointed seven new directors to fill the resulting vacancies.  The Company invested $16.2 million of the proceeds of the stock offering in the Bank as additional capital, resulting in compliance with provisions of the Consent Order that required the Bank to achieve certain minimum capital levels.  See Notes 2 and 18 for additional information related to the Consent Order and the Company’s sale of common stock.

During 2010, the Board of Directors and management implemented changes to the operating policies of the Company and the Bank to improve credit and other operating practices.  In April, the Bank was granted fiduciary powers and subsequently began offering trust, investment and private banking services.  The Bank continues to monitor and workout a sizable classified asset and other real estate owned portfolio.
 
 
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The following key factors summarize the Company’s financial condition at year-end 2010 compared to year-end 2009:

·   
Total assets increased by $7.4 million from $163.2 million to $170.6 million;
·   
Total deposits increased by $3.4 million from $139.8 million to $143.2 million;
·   
Total shareholders’ equity increased by $14.1 million from $2.4 million to $16.5 million;
·   
Tier 1 capital increased by $13.6 million to $16.2 million, and the Bank achieved compliance with the minimum capital requirements of the Consent Order;
·   
Net loans increased modestly by $291,000 to $101.1 million;
·   
Nonaccrual loans decreased by $2.3 million from $5.8 million to $3.5 million; and
·   
Other Real Estate Owned decreased by $2.2 million from $3.2 million to $1.0 million.

The following key factors summarize our results of operations for 2010 compared to 2009:

·   
Net interest income increased modestly by $34,986 to $4.7 million in 2010;
·   
A negative loan loss provision contributed to earnings and totaled $116,147 for 2010 compared to loan loss provision expense of $4.5 million for 2009;
·   
Gains on the sale of available securities, net of charges for other than temporary impairment (“OTTI”) of investment securities, totaled $108,965 for 2010 compared to $806,987 for 2009;
·   
The direct write-down of other real estate owned totaled $542,490 for 2010 compared to $1,665,004 for 2009;
·   
Total noninterest expenses increased $1.6 million to $8.9 million in 2010 from $7.3 million in 2009;
·   
The Company recorded investor expenses of $517,222 for the period in connection with the assignment of promissory notes from Excel Financial to the Company in connection with the assignment of the Stock Purchase Agreement to Excel Bancorp by Excel Financial;
·   
The Company incurred other consulting and compensation expenses related to services provided by Excel Financial prior to the Closing, for the hiring of new management and severance expense associated with employee terminations.
·   
The Company began a new line of business offering trust, investment and wealth management services during 2010.

The following forward-looking statements describe our near term outlook:

·   
Credit quality is expected to remain a primary focus of the Company, and costs associated with credit administration and collection efforts will remain high;
·   
Commercial lending,  with an emphasis on commercial and industrial lending, and new services in trust, brokerage and wealth management are expected to expand;
·   
Operating expenses associated with new management and new services are expected to be higher than the historical compensation costs at the Company;
·   
Noninterest income is expected to improve due to the introduction of trust, investment and wealth management services.
·   
The Bank’s costs associated with its regulatory risk profile including FDIC insurance and regulatory examination costs, although improved from 2009, will remain high until asset quality and earnings improve.

CRITICAL ACCOUNTING POLICIES

The preparation of consolidated financial statements and related disclosures in accordance with U.S. generally accepted accounting principles requires us to make judgments, assumptions and estimates at a specific point in time that affect the amounts reported in the accompanying consolidated financial statements and related notes. In preparing these financial statements, we have utilized available information including our past history, industry standards and the current economic environment, among other factors, in forming our estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. It is possible that the ultimate outcome as anticipated by management in formulating our estimates inherent in these financial statements may not materialize.  Application of the critical accounting policies described below involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.  In addition, other companies may utilize different estimates, which may impact the comparability of our results of operation to similar businesses.
 
 
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Allowance for loan losses.  The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs. We estimate the allowance balance by considering the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors.  Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged off.  Loan losses are charged against the allowance when we believe the loan balance cannot be collected.

We consider various factors, including portfolio risk, economic environment and loan delinquencies, when determining the level of the provision for loan losses. We monitor loan quality monthly and engage an independent third party each quarter to help monitor and confirm our loan grading conclusions.

Valuation allowance for deferred tax assets.  Another critical accounting policy relates to valuation of the deferred tax asset for net operating losses. Net operating loss carryforwards of approximately $8,987,000 will expire as follows: $1,419,000 on December 31, 2027, $132,000 on December 31, 2028, $1,694,000 on December 31, 2029, and $5,742,000 on December 31, 2030.  A valuation allowance has been recorded for the related deferred tax asset for these carryforwards and other net deferred tax assets recorded by the Company to reduce the carrying amount of these assets to zero.  Additional information is included in Notes 1 and 12 to our audited consolidated financial statements.

FINANCIAL CONDITION – DECEMBER 31, 2010, COMPARED TO DECEMBER 31, 2009

Assets. At December 31, 2010, assets totaled $170.6 million, up $7.4 million from $163.2 million at December 31, 2009. During 2010, the focus of the Company shifted from a focus on capital preservation to positioning the Company for future growth.

Cash and Cash Equivalents.  Cash and Cash Equivalents increased by $8.5 million to $32.7 million at year-end 2010 compared to $24.2 million at year-end 2009.  The Company maintained a strong liquidity position during 2010 as a defense against increasing interest rates and to mitigate the impact of higher interest rates on the segment of its investment and loan portfolios with fixed rate, long term characteristics.  Also, during periods of low interest rates, cash flows typically increase on investments and loans as borrowers are inclined to prepay obligations to refinance at lower interest rates.

Securities. Total securities classified as available for sale decreased by $1.7 million to $25.2 million. The portfolio consists primarily of 30-year mortgage backed securities issued by GNMA, an agency guaranteed by the full faith and credit of the U.S. government.  During 2009, the Bank sold approximately $59.4 million of 15, 20 and 30 year mortgage backed securities and reinvested the proceeds into GNMA securities to improve its risk weighted capital ratios.   The proceeds from the sale of securities sold for a substantial gain during 2009 were reinvested in long-term GNMA securities at lower yields.  During 2010, investment purchases were geared toward callable agency bonds with the expectation that the bonds would likely be called prior to maturity, but until then would provide a higher yield than federal funds sold.   At December 31, 2010, the duration of the portfolio excluding equity investments was approximately 3.2 years compared to 4.9 years at December 31, 2009.  Securities with longer durations can be expected to contribute to increased volatility in the market value of the portfolio for any given change in market rates. At year-end 2010, the net unrealized gain on securities available-for-sale and held-to-maturity was approximately $427,807 compared to a net unrealized loss on the portfolio at December 31, 2009 of approximately $183,453.

Loans.  Total portfolio loans, net of the allowance for loan loss and deferred loan fees, increased $291,029 at December 31, 2010 to $101.1 million, compared to $100.9 million at year-end 2009.  Since the end of the third quarter of 2010, total portfolio loans increased $6.6 million.  Fourth quarter 2010 loan activity resulted in commercial loan balances increasing by $6.5 million.  Loans classified by management as special mention, substandard or doubtful and not deemed impaired represented 12.5% of total loans at December 31, 2010 compared to 14.3% of total loans at September 30, 2010, and 12.7% at December 31, 2009.   Impaired loans represented 3.3% of total loans at December 31, 2010 compared to 3.9% of total loans at September 30, 2010, and 5.6% of total loans at year-end 2009.  Improving asset quality is a prime objective for management.   Outstanding loan balances are expected to increase through business development efforts.
 
 
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Allowance for Loan Losses and Asset Quality. The allowance for loan losses totaled $3.1 million at December 31, 2010, a decrease of $890,000 compared to $3.9 million at December 31, 2009. The amount of the allowance is based on a combination of actual experiential factors such as historical losses for each category of loans and information about specific borrowers as well as projections for various other factors, including delinquencies, general economic conditions and the outlook for specific industries, which are more subjective in nature.  During 2010, the Company recognized loan charge-offs totaling $953,000 and recoveries totaling $179,000.  During the fourth quarter of 2010, the Company charged off loans totaling $341,000 and collected recoveries of $40,000.  The Company also reduced its estimate of incurred losses in the loan portfolio through the recognition of a negative loan loss provision totaling $116,000 for the year and a negative loan loss provision of $257,000 during the fourth quarter of 2010. The negative loan loss provision had a positive impact on earnings.  During 2009, the Company recognized loan charge-offs totaling $4.4 million, including $2.7 million during the fourth quarter of 2009. The fourth quarter charge-offs included all specific reserves previously allocated at the end of the third quarter of 2009.  Recoveries of $470,000 were collected during 2009 due primarily to a $366,800 mediated insurance settlement related to construction defects in one of the loans charged off and a recovery of $54,800 on a commercial loan that was repaid.
 
As a percentage of total loans, the allowance for loan losses decreased from 3.76% at year-end 2009 to 2.93% at the end of 2010.   We continue to closely monitor credit quality and delinquencies as our loan portfolio ages, and will increase the allowance for loan losses if we believe losses have been incurred.
 
Loans are considered nonperforming if they are impaired or if they are in nonaccrual status. Nonperforming loans, excluding overdrafts, totaled $3.4 million at December 31, 2010 compared to $5.8 million at December 31, 2009.  During 2010, reductions to nonaccrual loans included transfers to assets acquired through settlement of loans of $2.1 million, principal payments and payoffs of $983,000, charge-offs of $940,000 and upgrades of $239,000.  Additions to nonaccrual loans totaled $1,829,000.  During 2009, 34 loans totaling approximately $7.4 million converted to nonaccrual status, four loans totaling $372,961 were paid off, ten loans totaling $1.5 million were charged off, sixteen loans were charged down by $2.7 million, and ten loans totaling $1.0 million were transferred to assets acquired through settlement of loans.
 
Assets acquired in settlement of loans.  These assets include OREO and  an interest in a limited liability company acquired during 2010 that owns the real estate and operations of an indoor waterpark and resort obtained through a U.S. Bankruptcy Code 363 sale.  The limited liability company was formed by the lead bank for the banks participating in the project financing to acquire title to the real estate, conduct the operation of the facility, and market the real estate and the operations of the business for sale.  The carrying value of its interest is $1.3 million and is based upon the estimated fair value of the real estate less costs to sell.  OREO consisted of seven properties and totaled $1.0 million at year-end 2010 compared to $3.2 million and fifteen properties at year-end 2009.   During 2010, seventeen properties were sold from OREO for sales proceeds of $2.6 million.  During 2009, twelve properties were sold from OREO generating $1.6 million in sales proceeds.
 
Deposits.  Total deposits increased $3.4 million from year end 2009 to $143.2 million at December 31, 2010.  Overall, core deposit balances increased 9.3% to $89.6 million from $82.0 million. Noninterest bearing demand deposits increased 33.8% to $20.8 million. Our certificate of deposit portfolio decreased $4.2 million during the period to $53.6 million or 37.4% of total deposits compared to $57.8 million, or 41.3% of total deposits, at year-end 2009.  The decrease was largely the result of promotional certificates maturing without reinvestment into currently offered certificate of deposit products.  Customers are reluctant to extend the maturity of their deposits given the low interest rate environment that prevailed throughout the year.
 
Repurchase agreements.  Total repurchase agreements increased $3.3 million from year end 2009 to $4.4 million at December 31, 2010.  The increase is primarily due to a new commercial customer relationship that utilizes this product.
 
 
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Federal Home Loan Bank Advances.  Total advances decreased $13.5 million from $18.5 million at December 31, 2009 to $5.0 million at December 31, 2010.  The remaining $5.0 million in advances are expected to be repaid at maturity during the first quarter of 2011.
 
RESULTS OF OPERATIONS – YEARS ENDED DECEMBER 31, 2010 AND 2009

The Company incurred losses for both 2010 and 2009. The loss for 2010 was $3,110,110, or $0.18 per share with an average of 17,365,249 common shares outstanding.  The loss for 2009 was $6,659,594, or $3.01 per share with an average of 2,214,564 common shares outstanding.

Net interest income. For the year ended December 31, 2010 and 2009, net interest income was largely unchanged at $4.7 million, although the Company’s net interest margin increased to 2.93% in 2010 compared to 2.77% in 2009.  Low interest rates prevailed across the yield curve during 2010 and 2009 following the financial crisis that occurred during the fall of 2008, the ensuing economic events, and the Federal Reserve Bank’s efforts to assist an economic recovery.

Interest income. Interest income decreased from $8.7 million in 2009 to $6.9 million in 2010 due to a smaller earning asset base and lower yields on earning assets.  The yield on earning assets declined from 5.18% in 2009 to 4.31% in 2010, and interest-earning assets decreased from $168.0 million in 2009 to $160.2 million in 2010.  Average balances for loans decreased $16.1 million, securities available for sale decreased $6.8 million and interest-bearing deposits and federal funds sold increased $15.0 million.  Of the $1.8 million decrease in interest income from 2009 to 2010, about $1.2 million is attributed to lower asset volumes and about $600,000 is attributable to lower interest rates.

Interest expense. Total interest expense declined $1.8 million from $4.1 million in 2009 to $2.2 million in 2010, a decrease of 45.3%.  The cost of interest bearing funds averaged 1.62% for 2010 compared to 2.65% for 2009.  Interest expense on deposits decreased $1.5 million to $1.8 million in 2010 compared to $3.3 million in 2009.  The most significant declines in deposit interest expense were from lower rates paid for money market and certificates of deposit balances; interest paid for these two deposit types declined by $1.3 million.  Other borrowing costs also declined by $362,000 due to lower rates and outstanding balances.

Provision for loan losses. A negative loan loss provision in the amount of $116,147 was recorded for 2010 compared to provision expense of $4.5 million in 2009.  The reduction to the Allowance for Loan and Lease Loss was primarily driven by eliminating the loan charge-offs experienced during 2007 from its historical loan loss experience.  The Company’s uses three years of charge-off experience in its calculation of the loss rate for pass-rated loans.  Eliminating the 2007 loan losses from the loss rate reduced the Allowance for Loan Loss by approximately $863,000 at year end 2010 compared to year end 2009.  Loan charge-offs during 2007 were significantly higher than in subsequent years.

The methodology for estimating losses on special mention loans was revised to include a loss rate based on loss experience for this category instead of a standard flat loss percentage.  This resulted in an increase of about $179,000 in the Allowance for Loan Loss after also factoring in a decrease in the balance of special mention loans of about $1.1 million from year end 2009 to year end 2010.

A decrease in the loss rate applied to substandard loan balances at year end 2010 compared to year end 2009 resulted in a reduction to the Allowance for Loan Loss of about $531,000 even though the balance of substandard loans increased  by about $461,000 from year end 2009 to year end 2010.

The allowance for loan loss allocated to other factors increased by $319,000.  The increase was principally driven by regulatory and other economic factors.  Specific allocations of the Allowance for Loan and Lease Losses increased approximately $6,000 at year end 2010 compared to 2009.

Charge-offs taken during 2010 totaled $953,126.  Charge-offs taken during 2009, particularly during the fourth quarter of 2009, contributed to higher loss experience ratios, thus requiring a higher loan loss provision in 2009. In 2009, charge-offs included losses for two participation loans totaling $1.8 million; both loans funded construction of hotel/water park properties outside of the Company’s local lending area.
 
 
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Noninterest income.  For the year ended December 31, 2010, noninterest income increased to $814,171 from $225,681 for 2009.  In both 2009 and 2010, the Company recognized OTTI charges for FNMA and FHLMC preferred stock owned.  In 2009, the OTTI charge was $111,200, and for 2010 the OTTI charge was $47,200.  The current carrying value of these securities is $70,720 and includes an unrealized gain of $29,120.  Gains realized on securities available for sale during 2010 totaled $156,165; securities sales during 2010 were aimed at reducing the interest rate sensitivity of the investment portfolio. The impact of the OTTI charge for 2009 was more than offset by gains realized on securities available for sale totaling $918,187. Gains realized on securities available for sale during 2009 were conducted to improve risk-based capital ratios.

In both 2009 and 2010, the Company recognized losses on the disposition or direct write-down of other real estate owned.  For 2010, the net loss on disposition or direct write-down of other real estate owned totaled $341,631 on twenty-three properties compared to a net loss of $1,522,008 on twenty-two properties for 2009.

Service charges and other fees increased $104,469 to $933,878 in 2010 compared to $829,409 for 2009.  The increase was driven by the introduction in 2010 of new services for trust, investment, and asset management fees which contributed $223,625 in noninterest income.  This positive contribution was partially offset by lower overdraft fees that fell by $126,514, or 22.9%, compared to 2009.  The reduction in overdraft fees is directly related to federal legislation that became effective during 2010 requiring banks to ensure that customers “opt-in” to bank-offered overdraft protection programs.  Other fee income including services fees, check printing, ATM and debit card revenue increased $7,358 from 2009 to 2010.

Gains on the sale of loans increased by $10,733 to $68,084 in 2010, up from $57,351 in 2009.  Efforts to advance mortgage activity resumed following the closing of the stock offering in early 2010.  Prior to the stock offering, lending was severely restricted based on efforts to improve the Company’s capital ratios.  An experienced mortgage and consumer loan manager was hired to revitalize mortgage operations.  Other income declined from $58,729 in 2009 to $53,574 principally due to the reduction of rental income associated with other real estate owned.

Noninterest expense.  Total noninterest expenses increased $1,648,706, or 22.6%, to $8,933,543 during 2010 compared to $7,284,837 for 2009.  Substantial costs were incurred related to the change in ownership control and subsequent change in management.  The Company recorded investor expenses of $517,222 in February 2010 in connection with the assignment of promissory notes from Excel Financial to the Company in connection with the assignment of the Stock Purchase Agreement to Excel Bancorp by Excel Financial.   The investor expenses represent expenses incurred in connection with the pursuit of an acquisition of a financial institution and development of fiduciary services in connection with an acquisition.  Other changes are described below.

Salaries and benefits increased $1,148,041 to $3,970,412 in 2010, or 40.7%, compared to $2,822,371 in 2009.  Salaries expense included incentive compensation totaling $228,000 during 2010 for newly hired management.  Salaries and benefits expense also included salary continuation for terminated staff totaling $61,603 and for departing executive management totaling $85,569.  New positions were added in trust and investment services, credit administration, human resources and other departments within the Company.

Occupancy and equipment costs increased $89,661, or 10.7%, in 2010.  Approximately $67,000 of this increase related to a new trust and investment office that opened in St. Clairsville, Ohio, in February 2010.

Professional fees increased $230,045, or 42.8%, in 2010.  These costs include legal, accounting and auditing, regulatory examination and consulting fees.  Consulting fees of $140,000 were paid to Excel Financial for the period prior to closing the stock offering.  The Company also retained experienced problem loan workout specialists to assist in loan collection efforts.

Franchise tax decreased $82,743, or 73.7%, in 2010 due to a lower capital valuation at year end 2009 compared to year end 2008.  Ohio franchise tax for financial institutions is assessed based on the company’s net worth for the previous year end.  Franchise tax will increase to more than $200,000 in 2011 as a result of the recapitalization during 2010.
 
 
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Marketing and advertising expense increased $29,609, or 29.6%, in 2010.  During the first quarter of 2010, the Board of Directors of the Bank approved changing the name of the Bank to Premier Bank & Trust, National Association.  The Bank opted to include “Trust” in its name in connection with obtaining fiduciary powers from the Office of the Comptroller of the Currency.  The Bank also expects to conduct trust services in several states.  Costs associated with the name change including logo design, costs associated with the reissuance of credit and debit cards, and promotional materials totaled approximately $30,000.

Deposit expense and insurance fees decreased $411,686, or 45.3%, in 2010. During the second quarter of 2009, the FDIC imposed an emergency assessment for all insured financial institutions that was paid in September 2009.  The assessment totaled $88,878 and was based on total assets as of September 30, 2009.  In addition to the absence of this special assessment in 2010, an improvement in the Bank’s risk rating for FDIC insurance based on higher capital levels following the common stock issuance in February contributed to a reduction in this expense for 2010.

Other expenses increased $136,864, or 11.9%, in 2010.  Cost increases for directors’ and officers’ liability and fidelity bond insurance policies increased approximately $94,000, loan expenses increased approximately $140,000, other employee and director related expenses increased $72,000. Other real estate owned expenses decreased approximately $161,000 and other taxes decreased $8,000.

Tax benefits recorded during 2010 totaled $202,501 and are the result of the application of generally accepted accounting principles that require an entity to record the tax effect of the change in deferred taxes for unrealized gains or losses on securities available for sale through other comprehensive income.  At December 31, 2009, the unrealized loss on securities available for sale was $237,367 and resulted in the recognition of a deferred tax asset (before valuation allowance) in the amount of $80,704.  At December 31, 2010, the unrealized gain on securities available for sale was $358,225 and resulted in a deferred tax liability of $121,797 (before valuation allowance). The deferred tax change of $202,501, characterized as a disproportionate tax effect under intra-period tax allocation rules, was recorded as a tax benefit with a corresponding adjustment to Other Comprehensive Income.

As a result of a change in the tax law in 2008 that allows net operating losses to be carried back five years, the Company was able to amend its 2003 tax return and record a refund of taxes paid for that year. The refund of $289,300 was offset by a $38,311 change in accrued taxes for 2008, resulting in a tax benefit of $250,989 for 2009.

OFF-BALANCE SHEET ARRANGEMENTS

At December 31, 2010, the Company had no unconsolidated, related special purpose entities, nor did the Company engage in derivatives and hedging contracts, such as interest rate swaps, that may expose us to liabilities greater than the amounts recorded on the consolidated balance sheet. The investment policy prohibits engaging in derivatives contracts for speculative trading purposes; however, in the future, the Company may pursue certain contracts, such as interest rate swaps, in an effort to execute a sound and defensive interest rate risk management policy.

LIQUIDITY

Liquidity refers to the ability to fund loan demand and customers’ deposit withdrawal needs and to meet other commitments and contingencies.  The purpose of liquidity management is to ensure sufficient cash flow to meet all of financial commitments and to capitalize on opportunities for business expansion in the context of managing interest rate risk exposure.  This ability depends on the financial strength, asset quality and the types of deposit and loan instruments offered to our customers.

The Company’s principal sources of funds are deposits, repurchase agreements, loan and security repayments and maturities, sales of securities, capital transactions and borrowings from the FHLB.  While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan and security prepayments are more influenced by interest rates, general economic conditions, and competition.  Investments in liquid assets are maintained based upon our assessment of the need for funds, expected deposit flows, yields available on short-term liquid assets and the objectives of the asset/liability management program.
 
 
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The Company’s liquidity contingency funding plan identifies liquidity thresholds and raises red flags that may evidence liquidity issues.  The contingency plan details specific actions to be taken by management and the Board of Directors and identifies sources of emergency liquidity, both asset and liability-based, should the Company encounter a liquidity crisis.  Liquidity risk is actively monitored and various scenarios are analyzed that could impact the Company’s ability to access emergency funding in conjunction with asset/liability and interest rate risk management activities.

Cash and cash equivalents increased from $24.2 million at December 31, 2009 to $32.7 million at December 31, 2010.  Cash and cash equivalents represented 19.2% of total assets at year-end 2010, compared to 14.8% of total assets at year-end 2009. The increase was primarily due to increases in funding from the proceeds of the common stock issuance totaling $16.7 million, an increase in deposits and repurchase agreements totaling $6.8 million, and sales, maturities and principal payments received on the investment portfolio totaling $15.0 million.  Partially offsetting these cash inflows were cash outlays for the purchase of investment securities totaling $13.0 million, repayment of FHLB debt totaling $13.5 million, and net loan funding of $3.6 million.

The Company monitors the liquidity position on a regular basis in conjunction with asset/liability and interest rate risk management activities. Our current liquidity level, including contingency funding available through borrowing facilities at the Federal Home Loan Bank and the Federal Reserve Bank, is sufficient to meet anticipated future growth in loans and deposits and general liquidity needs.

CAPITAL RESOURCES

Total shareholders’ equity was $16.5 million at December 31, 2010, compared to $2.4 million at December 31, 2009.  Shareholders’ equity increased due to the issuance of 17.5 million shares of common stock.  The net loss for 2010 reduced equity by $3.1 million.

Banks are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators.  Failure to meet capital requirements can result in regulatory action.

Current regulations require a total risk-based capital ratio of 8.0%, at least half of which must be tier 1 capital, and a leverage ratio of 4.0%.  The Bank’s total risk-based capital is made up of tier 1 capital and tier 2 capital.  Tier 1 capital is total shareholders’ equity, less any intangible assets.  Tier 2 capital includes the allowance for loan losses up to a maximum of 1.25% of risk-weighted assets.

On February 17, 2009, the Company agreed to a Consent Order with the OCC that required the Bank to reach and maintain tier 1 capital of at least 8.75% of adjusted total assets and total risk-based capital of at least 13.25% of risk-weighted assets by August 31, 2009.  At December 31, 2009, the Company had not met the terms of the Consent Order and was critically unercapitalized.  On February 19, 2010, pursuant to a Stock Purchase Agreement entered into on November 15, 2009 with Excel Financial, the Company received $15.0 million from Excel Bancorp in connection with Excel Bancorp’s purchase of 15 million shares of common stock, and raised an additional $2.5 million in connection with a private placement of 2.5 million shares of common stock.  After the closing of these transactions, Ohio Legacy contributed approximately $16.2 million to the capital of the Bank.  With the additional capital invested in the Bank, the Company exceeded the minimum capital ratios required under the Consent Order.  However, until the Consent Order is terminated, the Bank cannot be classified as well-capitalized under prompt corrective action provisions.  See Notes 2 and 18 to the consolidated financial statements for additional information regarding the Consent Order and Ohio Legacy’s sale of its common stock.

The payment of dividends by the Bank to Ohio Legacy and by Ohio Legacy to its shareholders is subject to restrictions by regulatory agencies.  These restrictions generally limit the Bank’s dividends to the sum of its current year’s the prior two years’ retained earnings. In addition, dividends may not reduce capital levels below the minimum regulatory requirements as described above. As of February 28, 2011, based on its year to date and previous year’s earnings, the Company is not able to declare dividends without prior approval from its regulators.  Pursuant to the Consent Order, prior to paying any dividends, the Bank must provide a written request to the OCC for review and determination of no supervisory objection.  In addition to the dividend restrictions above, the Bank is not permitted to accept brokered deposits without prior approval from its regulators.
 
 
28

 
 
INTEREST RATE SENSITIVITY

The following table details the variable rate composition of our interest-earning assets at December 31 2010 and 2009:

   
Percent variable rate
 
   
2010
   
2009
 
Interest-bearing deposits and federal funds sold
    100 %     100 %
Securities
    5 %     8 %
Loans
    69 %     75 %
Federal bank stock
    100 %     100 %
Total interest-earning assets
    64 %     66 %
 
The Company performs liquidity risk analysis at least monthly and interest rate risk analysis at least quarterly. This information is used to assist in managing the balance sheet to reduce the impact of changes in interest rates on earnings and equity. Approximately 53.92% of the interest-earning assets and 97.7% of the interest-bearing liabilities on our balance sheet at December 31, 2010 were scheduled to mature or subject to repricing during 2011.

We believe that the Bank is "liability sensitive" over a twelve-month horizon at December 31, 2010. Usually, this would mean an increasing interest rate environment would cause a drop in net interest income and a falling interest rate scenario would have the inverse effect. However, we cannot be certain that our net interest income would contract if interest rates increased because the composition of our assets and liabilities is constantly changing due to the variability of our loan prepayment experience, the behavior of core deposit customers and other factors.

IMPACT OF INFLATION AND CHANGING PRICES

The majority of our assets and liabilities are monetary in nature; therefore, we differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an important impact on the growth of total assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain appropriate capital ratios.  Inflation significantly affects noninterest expense, which tends to rise during periods of general inflation.  Deflation, or a decrease in overall prices from one period to the next, could have a negative impact on the Company’s operations and financial condition. Deflationary periods impute a higher borrowing cost to debtors as the purchasing power of a dollar increases with time. This may decrease the demand for loan products offered by the Bank.

We believe the most significant impact on our financial results is our ability to react to changes in interest rates. While we seek to maintain a fairly balanced position between interest rate sensitive assets and liabilities and to actively manage our balance sheet in order to protect against the effects of wide interest rate fluctuations on our net income and shareholders’ equity, constraints on capital and other factors may also affect our ability to minimize the impact of changes in interest rates.
 
 
29

 
 
Item 8.  Financial Statements and Supplementary Data.

CONSOLIDATED BALANCE SHEETS
As of December 31, 2010 and 2009
   
December 31,
   
December 31,
 
   
2010
   
2009
 
             
ASSETS
           
Cash and due from banks
  $ 1,121,473     $ 1,970,133  
Federal funds sold and interest-bearing deposits in financial institutions
    31,560,745       22,195,657  
Cash and cash equivalents
    32,682,218       24,165,790  
Certificate of deposit in financial institution
    100,000       100,000  
Securities available for sale
    25,206,895       26,892,105  
Securities held to maturity (fair value December 31, 2010 - $2,885,216, December 31, 2009 - 3,050,740)
    2,815,634       2,996,826  
Loans held for sale
    636,794       195,247  
Loans, net of allowance of $3,055,766 and $3,945,670 at December 31, 2010 and December 31, 2009
    101,146,194       100,855,165  
Federal bank stock
    1,557,700       1,267,250  
Premises and equipment, net
    3,461,455       2,952,392  
Assets acquired in settlement of loans
    2,351,302       3,175,658  
Accrued interest receivable and other assets
    658,779       640,595  
Total assets
  $ 170,616,971     $ 163,241,028  
                 
LIABILITIES
               
Deposits:
               
Noninterest-bearing demand
  $ 20,760,836     $ 15,521,829  
Interest-bearing demand
    9,564,745       9,372,841  
Savings
    59,285,422       57,119,495  
Certificates of deposit, net
    53,604,644       57,784,548  
Total deposits
    143,215,647       139,798,713  
Repurchase agreements
    4,391,252       1,037,776  
Long-term Federal Home Loan Bank advances
    5,000,000       18,500,000  
Capital lease obligations
    407,593       440,786  
Accrued interest payable and other liabilities
    1,131,963       1,097,242  
Total liabilities
  $ 154,146,455       160,874,517  
                 
                 
                 
                 
Commitments and contingent liabilities (Note 15)
    -       -  
                 
                 
SHAREHOLDERS' EQUITY
               
Preferred stock, no par value, 500,000 shares authorized, none outstanding
    -       -  
Common stock, no par value;
               
December 31, 2010:  22,500,000 shares authorized, 19,714,564 shares issued and outstanding
               
December 31, 2009:  5,000,000 shared authorized, 2,214,564 shares issued and outstanding
    35,603,803       18,782,779  
Accumulated deficit
    (19,289,011 )     (16,178,901 )
Accumulated other comprehensive income (loss)
    155,724       (237,367 )
Total shareholders' equity
    16,470,516       2,366,511  
                 
Total liabilities and shareholders' equity
  $ 170,616,971     $ 163,241,028  
 
 
See accompanying notes to consolidated financial statements.
 
 
30

 
 
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2010 and 2009
 
   
2010
   
2009
 
Interest and dividend income:
           
Loans, including fees
  $ 5,745,760     $ 6,984,552  
Securities, taxable
    897,438       1,504,830  
Securities, tax-exempt
    113,900       114,396  
Interest-bearing deposits, federal funds sold and other
    76,397       37,238  
Dividends on federal bank stock
    71,390       64,465  
Total interest and dividend income
    6,904,885       8,705,481  
                 
Interest expense:
               
Deposits
    1,846,924       3,321,169  
Short-term Federal Home Loan Bank advances
    -       2,085  
Long-term Federal Home Loan Bank advances
    279,955       648,426  
Repurchase agreements
    8,909       4,464  
Capital leases
    68,790       73,709  
Investor notes
    9,693       -  
Total interest expense
    2,214,271       4,049,853  
Net interest income
    4,690,614       4,655,628  
Provision for loan losses
    (116,147 )     4,507,055  
Net interest income after provision for loan losses
    4,806,761       148,573  
Noninterest income:
               
Service charges and other fees
    933,878       829,409  
Gain on sales of securities available for sale, net
    156,165       918,187  
Other than temporary impairment loss:
               
Total impairment loss
    (47,200 )     (111,200 )
Loss recognized in other comprehensive income
    -       -  
Net impairment loss recognized in earnings
    (47,200 )     (111,200 )
Gain on sale of loans
    68,084       57,351  
Gain on disposition of other real estate owned
    200,859       142,996  
Direct write-down of other real estate owned
    (542,490 )     (1,665,004 )
Loss on disposition of fixed assets
    (8,699 )     (4,787 )
Other income
    53,574       58,729  
Total noninterest income
    814,171       225,681  
                 
Noninterest expense:
               
Salaries and benefits
    3,970,412       2,822,371  
Occupancy and equipment
    930,594       840,933  
Professional fees
    767,586       537,541  
Franchise tax
    29,466       112,209  
Data processing
    722,155       681,719  
Marketing and advertising
    129,817       100,208  
Stationery and supplies
    80,157       69,000  
Amortization of intangible asset
    -       59,900  
Deposit expense and insurance
    496,727       908,413  
Investor expenses
    517,222       -  
Other expenses
    1,289,407       1,152,543  
Total noninterest expense
    8,933,543       7,284,837  
Net loss before income taxes
    (3,312,611 )     (6,910,583 )
Income tax benefit
    (202,501 )     (250,989 )
                 
Net loss
  $ (3,110,110 )   $ (6,659,594 )
                 
                 
Basic loss per share
  $ (0.18 )   $ (3.01 )
Diluted loss per share
  $ (0.18 )   $ (3.01 )
 
 
See accompanying notes to consolidated financial statements.
 
 
31

 
 
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the years ended December 31, 2010 and 2009
 
   
Outstanding
               
Accumulated
       
   
Shares of
               
Other
   
Total
 
   
Common
   
Common
   
Accumulated
   
Comprehensive
   
Shareholders'
 
   
Stock
   
Stock
   
Deficit
   
Income (Loss)
   
Equity
 
                               
                               
Balance, January 1, 2009
    2,214,564     $ 18,808,311     $ (9,519,307 )   $ 231,853     $ 9,520,857  
                                         
Stock based compensation expense
            (25,532 )                     (25,532 )
                                         
Comprehensive income (loss):
                                       
Net loss
                    (6,659,594 )             (6,659,594 )
Net unrealized gain (loss) on securities available for sale arising during the period, including effect of reclassifications
                            (469,220 )     (469,220 )
Total comprehensive loss
                                    (7,128,814 )
                                         
Balance at December 31 2009
    2,214,564       18,782,779       (16,178,901 )     (237,367 )     2,366,511  
                                         
Stock based compensation expense
            106,243                       106,243  
                                         
                                         
Proceeds on sale of common stock, net
    17,500,000       16,714,781                       16,714,781  
                                         
Comprehensive income (loss):
                                       
Net loss
                    (3,110,110 )             (3,110,110 )
Net unrealized gain (loss) on securities available for sale arising during the period, including effect of reclassifications
                            393,091       393,091  
Total comprehensive loss
                                    (2,717,019 )
                                         
Balance, December 31, 2010
    19,714,564     $ 35,603,803     $ (19,289,011 )   $ 155,724     $ 16,470,516  
 
 
See accompanying notes to consolidated financial statements.
 
 
32

 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2010 and 2009
 
   
2010
   
2009
 
             
Cash flows from operating activities:
           
Net loss
  $ (3,110,110 )   $ (6,659,594 )
Adjustments to reconcile net loss to net cash from operating activities:
               
Provision for loan losses
    (116,147 )     4,507,055  
Depreciation and amortization
    375,382       402,421  
Loss on disposition of fixed assets
    8,699       4,787  
Securities amortization and accretion, net
    297,186       127,335  
Origination of loans held for sale
    (6,509,650 )     (2,325,069 )
Proceeds from sales of loans held for sale
    6,129,622       3,199,211  
Gain on disposition of real estate owned
    (200,859 )     (142,996 )
Direct write-down of other real estate owned
    542,490       1,665,004  
Gain on sale of securities available for sale
    (156,165 )     (918,187 )
Other than temporary impairment of securities
    47,200       111,200  
Gain on sale of loans held for sale
    (68,084 )     (57,351 )
Stock based compensation expense
    106,243       (25,532 )
Net change in:
               
Accrued interest receivable and other assets
    (220,685 )     734,773  
Accrued interest payable and other liabilities
    34,721       (366,820 )
Deferred loan fees
    (1,892 )     17,257  
Net cash from operating activities
    (2,842,049 )     273,494